INTERVIEW: China alumina cuts creating supply opportunities, Norsk Hydro exec says

Roughly 6 million tonnes per year of alumina refinery capacity in China has been curtailed due to the 2019-nCoV coronavirus pandemic, opening opportunities for market participants in the West to sell extra material to the East asian country, a senior executive at Norsk Hydro has said.

The shortfall has arisen with Chinese smelters continuing to produce material as normal despite the effects of the measures being used to combat the coronavirus, John Thuestad, the company’s executive vice president, bauxite and alumina, told Fastmarkets in an interview.
“Our impression is that Chinese smelters have continued to produce at 100% of capacity. However, various sources point to approximately 6 million tonnes of alumina refinery capacity having been curtailed,” he said.
“This has led to higher alumina prices and the possibility for Western [market participants] to sell additional cargoes to China. We’re expecting Chinese refineries to gradually increase production as long as prices stay above their marginal cost,” he added.
Many Chinese alumina refineries reduced production after coronavirus-related transportation difficulties restricted their supplies of essential raw materials such as coal and bauxite.
Before the start of the Chinese lunar new year on January 24, Fastmarkets calculated the benchmark daily alumina index, fob Australia, at $277.92 per tonne on January 23, up from 275.93 per tonne a week earlier.
The index, which had traded between $275 and $278 per tonne since December 27 last year, gradually moved to a high of $305.46 per tonne on March 6, a level last seen in July 2019. It has since slipped and was assessed at $297.11 per tonne on Tuesday March 17.
Meanwhile, Fastmarkets’ weekly price assessment for alumina, metallurgical grade, ddp China, edged downward for the first time in four weeks on March 12, slipping from its year-to-date peak a week earlier of 2,540-2,620 yuan ($362-374) per tonne to 2,470-2,570 yuan per tonne.
Norsk Hydro’s three extruded products plants in Shanghai and Suzhou were closed by the Chinese authorities until February 10 due to the coronavirus. The Norwegian producer also has aluminium building systems offices in Beijing, Shanghai and Shenzhen.
As yet, it is still early to discern the full effects of the coronavirus, but Thuestad noted that how the aluminium value chain develops outside China will be key to how local and global levels are affected.
For its part, Norsk Hydro has not experienced any major logistical or transportation issues and all goods have been delivered according to plan, he said. “We follow up all our suppliers on a daily basis,” he said.
Similarly, the coronavirus has to date had limited consequences on Norsk Hydro’s customers, he added.
Supply chain disruptions due to the coronavirus have led many businesses to consider diversifying their sourcing. But the virus has not changed Norsk Hydro’s view of China’s importance to the alumina market, Thuestad said.
“We are running a global sourcing for the majority of raw materials needed for aluminium production. For all our sourcing categories, we have a strategic and holistic approach where we assess opportunities and risk, both long term and short term,” he told Fastmarkets.
“This [coronavirus situation] has not changed our view of China as an important market for alumina in the future,” he added.
Market dynamics
Coming on the heels of a trade war, the coronavirus situation has led numerous analysts and quasi-governmental organizations to lower their growth forecasts.
The International Monetary Fund has cut its 2020 growth outlook for China to less than 5.6%, citing the coronavirus, while the Organisation for Economic Co-operation & Development said that growth of global gross domestic product could drop in 2020 to 1.5%, almost half the 2.9% rate it forecast before the virus emerged.
Thuestad noted that the longer-term ramifications of the coronavirus in terms of its effect on markets, including alumina, should not be ignored.
“We can expect a challenging year with a likely surplus in the alumina market in 2020, which will potentially be affected by further developments through the year,” he said.
“It’s important to emphasize that [Norsk Hydro’s] Alunorte [alumina refinery in Brazil] has a low-cost position, which is beneficial for Hydro. Moreover, we are part of a cyclical industry of which we have a long-term perspective,” he added.
Norsk Hydro owns a 92.1% stake in Alunorte, having inherited the refinery following its acquisition of Brazilian state-owned miner Vale’s aluminium assets in the state of Pará in 2011.
Brazil disruptions
Earlier this month, Norsk Hydro was forced to close one of the four production lines at its Albras aluminium smelter joint venture in Brazil after a fire in an electrical transformer.
According to Thuestad, it was still too early to assess the financial implications of the Albras incident as well as the timing for a restart of the line that was shut down.
“One of the areas we are working on now is to get an overview of the necessary repairs,” he said. “In general, this is not critical for deliveries in the short term, and we have large portfolio to utilize, but we will provide more information when this is available.”
The company has faced several disruptions to its operations in Brazil over the past couple of years.
Alunorte was forced to cut output by 50% in March 2018 for 14 months after heavy rains prompted authorities to investigate a potential waste residue spill.
The refinery started ramping up in May 2019 and reached 90% by December, when a transmission tower at the Paragominas bauxite mine - which supplies the refinery - fell and power supply was cut. Alunorte’s capacity was temporarily cut to 50-70% before ramping up once again.
Industry structure
The aluminium supply chain has seen increased integration in recent years, with market participants moving into upstream production.
Thuestad noted that Emirates Global Aluminium made a significant investment in its Al Taweelah refinery in Abu Dhabi, while Press Metal Bintulu has taken a different approach by acquiring a portion of the Worsley refinery in Australia.
“We have over the past few years seen increasing interest from large short players to integrate upward into bauxite and alumina. So far, this development has not had any major effect on our business,” he said.
“We continue to be active in the global alumina market,” he added. “It seems like the trend is for several short players to be interested in securing a position upstream in order to reduce their exposure.”
 

Andrea Hotter

ahotter@fastmarkets.com

Published

Andrea Hotter

March 17, 2020

19:18 GMT

New York